During demonetisation, digital payments tiptoed in the world where cash payments ruled the roost. Though, digital payments received a cold response during demonetisation. Then no one could imagine that digital payments’ popularity would increase exponentially with volumes and value of transactions growing manifold to exceed the levels of 30 per cent of the GDP of the country. The fortunes of the digital payment industry started rising with the government imposing lockdown in 2020. The government announced demonetisation with a singular intent of curbing black money and parallel economy and bringing majority of the transactions within the formal economy. However, what demonetisation could not do, the coronavirus pandemic could achieve.
Digital payments system was initiated in India with the incorporation of National Payments Corporation of India (NPCI) in December 2008. Then the Reserve Bank of India (RBI) and the Indian Banks Association (IBA), India’s only industry body in the banking sector, took the lead in establishing NPCI. However, NPCI is a Not-For-Profit (Section 8) Company owned by banks. Then 10 banks joined the initiative as promoters of NPCI. Today the membership of NPCI exceeds five dozen, with not just banks, but even fintech companies being part of the initiative.
The NPCI runs two very significant initiatives — the Unified Payments Interface (UPI) and the RuPay Card. Recently, these two initiatives have attracted attention in wake of them going global. If NPCI’s operations have to be explained in a layman’s language, then NPCI is a payment infrastructure like Diners, Master Card, and Visa. NPCI has created its own proprietary instant real-time payment system to facilitate payments.
UPI and RuPay Card have grown exponentially in the past one year. In FY 2021-22, UPI handled payments worth around $1.1 trillion ($1.1 lakh crore) which is approximately Rs 85 lakh crore. This transaction value was achieved by processing more than 5 billion (500 crore) transactions during the year. This is one more significant achievement of UPI, wherein it processed more than 5 billion transactions in the financial year.
The value and volume of UPI transactions have doubled on a year on year basis. As per various industry sources, UPI transactions stand at around five-times the total value of debit and credit card transactions put together. This is an incredible feat that is achieved by UPI. Credit and debit card industry took decades to penetrate the market and expand its reach to achieve a dominant position in the payments business. UPI did that in less than half a decade. This was possible because more than 30 million UPI’s Quick Response (QR) Codes were taken by millions of merchants, which made digital payments extremely easy. This includes illiterate and semi-literate vegetable vendors and hawkers to big business houses. This helped UPI in achieving a 16 percent share in total retail payments.
In the same retail payments market, NPCI launched RuPay Cards in March 2012. However, it got traction after May 2014, with NPCI introducing a prepaid hosted solution model to banks for prepaid cards in July 2014 and then RuPay issuing Pradhan Mantri Jan Dhan Yojana (PMJDY) Cards in September 2014. RuPay hasn’t stopped looking behind. In FY 2021-22 RuPay transactions amounted to Rs. 2.5 lakh crore, which is a YoY increase of 40 percent. The average size of transactions on RuPay jumped from Rs 1,062.4 in FY 2017-18 to Rs 1,762.2 in FY 2021-22. This highlights the penetration of UPI and RuPay in the Indian retail payment market, and the success of NPCI in garnering a huge chunk of the market.
To enable globalisation of rupee, NPCI floated its wholly owned subsidiary NPCI International Payments Limited (NPIL) in August 2020. Initially NPIL is focusing on the merchant payment market. For this, NPIL has forged partnerships with payment solutions providers like NeoPay and PayXpert to internationalise the acceptance of its payment solutions in the UAE and the UK. Eight countries, viz the UAE, Japan, the US, the UK, Singapore, Bhutan, Nepal, and France have started accepting UPI’s QR-based payments system. NPIL is in talks with nearly 30 countries to launch UPI in their countries. NPCI has also received offers from various countries in Asia, Africa, and the Middle East to improve the payment infrastructure of those countries. This offers NPCI to take its platform global and offer an alternative to various countries to use along with SWIFT. With more and more countries joining India’s instant real-time payment system and the system getting accepted in those countries, internationalisation of Rupee would catch steam. NPIL’s next target is to conquer the remittances market that stood at $85.6 billion ($8,560 crore or around Rs 6.8 lakh crore) in FY 2021-22.
Another major step in internationalisation of Indian rupee is the Reserve Bank of India (RBI) Circular No. 10 RBI/2022-2023/90 dated 11 July 2022 on “International Trade Settlement in Indian Rupees (INR)”. By virtue of this circular, Indian enterprises can now carry out international trade in Indian rupees by issuing invoices and making and receiving payments in Indian Rupee. This will further help India in internationalising Indian rupee and trading in Indian rupee, instead of other currencies. At the same time, India is entering into bilateral treaties with various countries to expand and facilitate easier trade with those countries. India seems to be aware that internationalising Indian rupee is possible only when India deals with various countries on a one on one basis, instead of being part of a larger regional or multi-country trade treaty. It is obvious that any multilateral treaty involving multiple countries would have to use either US dollar or any other currency for all trade in that trading group.
With countries like Russia shifting its trade from US dollar to ruble, China pushing its trade in yuan, and now India initiating payments and receipts in Indian rupee, a slow process of dedollarisation has begun.
This raises the pertinent question of whether UPI can replace SWIFT. Before SWIFT was introduced, telex was used as the only means for a financial messaging system for global fund transfers. However, telex suffered from issues like low speed, security, and lack of uniform structured format for messaging in form of unified codes for banks and type of transactions. This resulted in human errors and slow processing speed. To address these issues SWIFT was founded in 1973.
Today SWIFT has onboard more than 11,000 financial institutions from across the world who transmit their financial messages through this system. SWIFT has more functionalities for transmitting interbank messages beyond just payments, like messaging of Letter of Credit and Bank Guarantees. This is not the case with UPI. At the moment UPI can be used for interbank transfer of funds. Whether NPCI would expand the scope of UPI and include other financial messaging formats and codes, only time would tell. However, it would be imperative for UPI to expand its mandate from pure payments to facilitation of other financial messaging that enables global trade.
Here the other question that would arise is how NPCI would handle transactions in multiple currencies. Currently, UPI is handling transactions only in Indian rupee and hence payment settlements are easy and there is no need for currency conversion. In its White Paper on “Auto Foreign Payments Conversion” the Payments Market Practice Group of SWIFT has stipulated that “the converting bank assumes the risk of auto-converting wire transfers. If multiple banks in a chain convert a transfer multiple times without express instructions from the ordering party to do so, it is the first bank in the chain that is auto-converted that is responsible for losses. Had they not made the first erroneous auto conversion, the subsequent receiving banks would have been acting in good faith according to their client agreements, bank policies and local market practices. An exception to this would be for service arrangements covered through bilateral agreements between banks.” SWIFT stipulates that banks offering auto conversion services need to deploy appropriate customer management and risk management strategies as discussed in the said White Paper.
This White Paper by the Payments Market Practice Group of SWIFT would help NPCI and NPIL in setting up its own systems and protocols pertaining to conversion of foreign currency. With conversion of foreign currency into local currency being the responsibility of the participant banks, NPCI will have to only focus on standards and protocols to safeguard its and customers’ interests. Currency conversion and transactions would be the responsibility of the banks. Banks can use the same processes and protocols that they use for conversion of foreign currency payments received on SWIFT.
SWIFT is widely criticised by various countries for being an extension of the US’ foreign policy arm that is used to arm-twist countries by imposing sanctions and disrupting its international trade and payments. With NPIL’s foray in the international market by entering eight countries and working on entering other 30 countries, SWIFT would face a challenge from UPI. UPI working on the strategy of biting what it can chew by focusing first on the $85.6 billion remittances market and on payments market and then helping various countries with their payments system, is the way ahead for internationalisation of Indian rupee. With more and more international transactions happening in currencies other than US dollar and payments happening on payments systems other than SWIFT, it is quite possible that the world would see dedollarisation in the future. In such a situation, NPCI’s UPI would be one of the many catalysts that would have enabled transformation of global trade dominated in US dollar to a dedollarised one.
The author is a Chartered Accountant by qualification and a Corporate Finance professional. He is also the author of ‘Diagnosing GST for Doctors’, published by CNBC Books18. He tweets from @sumeetnmehta. Views expressed are personal.
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